Already a wreck, the worst is yet to come with Obamacare

In this post on Obamacare in Indiana, I argue why the law will fail. You can read my argument for why Obamacare will succeed here. A third post, arguing why Obamacare will be a “non-event,” will be published on Aug. 8. No single post should be read as my personal view on Obamacare, but rather as my best attempt to analyze the available evidence for three potential outcomes of the law.

Obamacare is destined to fail for one key reason: it will make health insurance cost more and buy less.

Consider other sectors where prices rose sharply while the quality of the product sank. Suburban housing circa 2006. Your daily newspaper since 2006. How’d those work out—for both businesses and consumers?

Well, expect Obamacare to do the same thing for health insurance.

Obamacare has created millions of pages of new rules and billions of dollars in new taxes—all of which contribute to driving up the cost of health insurance.

That will be true of the 685,000 Hoosiers that are expected to buy insurance through the newly created insurance exchanges. More importantly, it will also be true for the 3.7 million Hoosiers that continue to get health insurance through an employer.

That’s about three-quarters of the population. Repeat the same story in all 50 states, and there will be a lot of angry people out there. Enough to spark a political backlash.

Employers should expect to see their health benefits costs rise at the same pace they have for the past half decade, plus an additional 20 percent as some Obamacare icing on the top.

Why? Because Obamacare taxes health insurers, who will likely pass that on to employers as a 2-percent to 3-percent premium increase. Because employers must pay new taxes to help the federal government pay for new kinds of medical research and for a “transitional reinsurance” fund to offset the liklihood that the exchanges will attract more sick people than healthy ones. And because penalties on individuals who don’t buy insurance will push more people into employer plans, also driving up overall costs.

The increasingly unaffordable insurance that Obamacare will produce will push numerous employers into Obamacare's “Cadillac" tax. In 2018, any employer or health insurer will be forced to pay a whopping 40 percent excise tax on the cost of their health plan that exceeds $ 10,200 for an individual and $ 27,500 for a family.

Companies such as Columbus-based Cummins Inc. have been raising their deductibles in order to keep their benefits from triggering the tax. Obamacare is also pressuring many union health plans to shift significantly more financial risk onto workers.

Indeed, one of the oddest sights this year has been the calls by several unions—some of Obama’s staunchest political supporters—for the outright repeal of Obamacare. Why? Because they know the rich health benefits they have negotiated for so diligently for the past 30 years will vanish.

That’s the future Obamacare will bring: pay more, get less.

The changes to employers are important because they affect more people. But it’s Hoosiers in the exchanges that have the most to worry about.

New rules in the exchanges will make health insurance more affordable for those with very expensive conditions, such as cancer, and will most likely make insurance cheaper for older patients, childbearing women and those making below-average wages.

But for everyone else, there will be rate shock, as Obamacare drives up the average cost of insurance in Indiana by 72 percent. And it could get far worse than that.

That’s because Obamacare requires health insurers offering plans in the exchanges to cover everyone, with no consideration of anyone's health status in the price of the product (other than factoring in tobacco use and age).

That is a sure-fire recipe for the exchanges becoming a magnet for sick people and a no-go zone for healthy people. In insurance speak, that’s called a death spiral.

The only thing standing between Obamacare and death spirals in all 50 states is a tax on individuals that tops out at $695 in 2016. That fine is expected to force young, healthy patients to buy expensive health insurance, so they can cover the costs of all the older, sick people who will flood into the exchanges.

Imagine you’re just out of college and you can only find part-time jobs paying $10-$12 an hour—an increasingly common reality since Obamacare, by requiring employers to look back 12 months to determine their number of full-time workers on Jan. 1, 2014, has already begun to discourage the hiring of full-time workers.

You’ll still have to pay $1,100 to $1,600 for health insurance—even after Obamacare’s subsidies. And that’s for a plan with a good-sized deductible—meaning you’ll pay out of pocket for the first $2,000 or so of your expenses.

If you were young, poor and healthy, would you spend $100 a month extra on something you don’t use or which, if you do use it occassionally, still makes you pay the doctor’s bill anyway? I don’t think so.

But let’s say, by some miracle, Obamacare avoids death spirals in the exchanges. Even so, the real-value of health insurance will actually go down. That’s because insurers believe that in order to have any chance of signing up healthy people, they need to keep the price as low as possible. So they are offsetting the increased costs created by Obamacare’s rules and taxes by sharply limiting the number of doctors and hospitals their policyholders can visit.

Oh, and the health plans are paying those doctors and hospitals less, too.

Indianapolis-based WellPoint Inc. expects the health plans it sells through the exchanges to pay health care providers at close to Medicare rates—which are typically about 30 percent less than what individual insurance policies pay now.

If exchange plans pay low rates, expect hospitals and doctors to find ways to avoid those patients. They have lots of options. Some doctors are simply leaving the third-party insurance system altogether, setting up concierge practices that run primarily on cash retainer payments. That’s a problem for anyone that wants to pay with health insurance.

Other doctors are splitting their practices into two sides—one that takes insurance and one that operates on cash. If you’re paying with insurance, expect the wait times to grow—and grow and grow. In Massachusetts, which enacted a law similar to Obamacare in 2006, it still takes about six weeks to see a doctor—and half of physicians aren’t accepting any new patients at all.

Hospitals, especially in Indianapolis, have been quite adept at following the migration patterns of customers with employer-sponsored insurance, making the best health care abundant in Hamilton County but non-existent in Haughville.

And I haven’t even talked about the access problems that patients with Medicaid—if Indiana even decides to expand the program, as Obamacare calls for—will have seeing a doctor or finding a convenient hospital facility.

Obamacare may expand the number of people with health insurance, but it will leave those people fighting to actually get care. And once Hoosiers and Americans realize that, they will turn on the law.

The only question is if the Obamacare train wreck happens in high speed or slow motion. Said another way, Obamacare is certain to tarnish the president’s legacy, but will it fail so hard and so fast that he is literally chased from the White House in 2016, sort of like George W. Bush was in 2008, by a candidate promising over and over again to reverse “the failed policies of Barack Obama”?

The answer lies in how bad things go with the nitty-gritty technical functions of Obamacare. So far, the Obama team has an awful track record on implementation. Almost no part of the law has been rolled out smoothly, if at all.

Obamacare’s long-term-care insurance program was scotched because its actuarial assumptions were so bogus (the entire thing was used to help the law get a better budget score from the Congressional Budget Office).

Obamacare’s high-risk pool got going but only helped a fraction of the people it was supposed—and, in a harbinger of things to come, incurred costs far higher than projected.

In May, the Obama team delayed a plan to offer a choice of health plans to workers at small businesses that buy through the Obamacare federal exchanges. And in June, Obama’s IRS simply decided to take a year’s break in enforcing the tax penalty against employers that don’t offer health insurance.

Not only that, but the Obama team is not actually going to check if your income qualifies you for one of exchanges’ tax credits. They’re just going to take your word for it initially, and then let you sort it out on your taxes. Which means you could end up having to write a multi-thousand-dollar check back to the government in 2015.

So with that inspiring record, the Obama team has promised—and promised and promised and promised again—to have exchanges up and running by Oct. 1 in 33 states—including Indiana. And God bless them, they just might do it—if they change the definition of the word “running.”

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Expect deja vu: Obamacare won't fix health care

In this post I predict that Obamacare will be a non-event in Indiana. Two previous posts argued for why Obamacare will succeed and why it will fail. No single post should be read as my personal view on Obamacare, but rather as my best attempt to analyze the available evidence for three potential outcomes of the law.

After 10 months of acrimonious debate, 2,000 pages of legislation, 20,000 pages of regulations, and nine years before full implementation, Obamacare is going to bring us back to where we started.
Oh, it will fix a few issues along the way—and it will create some new ones.
But by and large, Obamacare will leave in place the same major problems in the health care system that existed before the law was passed—in both Indiana and across the nation.
- Costs, of both health care and health insurance, will remain high and will proceed on their faster-than-inflation march.
- Those costs will still be borne by employers and their workers, as hospital systems shift the burden of under-payment by publicly financed health insurance onto employers.
- The third-party insurance system will be permanently entrenched as the beneficiary of both a $300 billion per year tax break for employers but also now a $150 billion per year flow of subsidy payments for individuals buying in the exchanges.
- And yet, there will still be a large number of uninsured Hoosiers (and Americans).
- Significant inequities will continue to exist in the American health care system. They will not all be the same inequities as before, but they will be there.
- The gradual rise of consumerism—by exposing families to more of the costs of their care—will go on, in spite of the dislike President Obama and many health care providers have toward health savings accounts. But now, HSAs will be a reality for more Hoosiers than ever.
This is why I say Obamacare will be a “non-event.”
Obamacare requires health insurance policies purchased by employers with more than 50 workers to adhere to various new rules and pay new taxes. But there is a way to get around some of those rules and taxes, and more employers are taking advantage of it.
Rather than buying insurance from a health insurer like Indianapolis-based WellPoint Inc., an employer can act as its own insurer. So it simply hires WellPoint or a third-party administrator to process its workers’ medical claims, but not to take on the financial risk of those claims.
Then an employer buys a different kind of insurance called stop-loss, when medical claims exceed $50,000 or $100,000 for one worker or a predetermined amount for the employer's entire workforce. This is called “spec and agg” coverage. It’s like a high-deductible health plan for an entire company.
Self-insurance rates were already higher in Indiana than in other states. Getting precise data is difficult, but local insurance professionals say a good rule-of-thumb estimate is two-thirds of Hoosiers with employer-sponsored health benefits get them from a self-insured employer. The rate is 58 percent nationally, according to a Rand Corp. study, and has been rising.
Dr. Ben Park, the CEO of American Health Network, expects those the rate of self-insurance among employers to shoot up to 90 percent in Indiana. That’s because the companies that offer stop-loss insurance have revamped their products to appeal to smaller and smaller employers. Some stop-loss insurers are signing up employers with as few as 10 employees, according to local benefits brokers.
If nine out of every 10 workers at Indiana employers is covered by a self-funded insurance plan, that means those employers are not bound by Obamacare’s mandates on essential health benefits. It also means they can avoid the community rating risk pool that small employers buying a health insurance will be part of. That’s an advantage for any employer with a generally younger or healthier workforce.
Also, self-funded employer and stop-loss insurers will not be subject to the new tax Obamacare will assess on actual health insurance policies sold by insurers. In Indiana, WellPoint expects such taxes to add 2.7 percent to overall premiums.
Still costs for employers are expected to rise even a bit faster than they had been for the past decade. Health care spending has moderated during the economic downturn but has hardly budged from the double-the-rate-of-inflation pace at which health care and health insurance have risen for the past 40 years.
Employers were hoping that hospital systems wouldn’t shift as many costs onto employers as they have in the past, because Obamacare’s expansion of insurance coverage would give the hospitals more paying customers.
But with Indiana not expanding its Medicaid program (so far) and with the newly insured that will flow into Obamacare’s exchanges landing in plans that pay as much as 30 percent less than employer health plans, the new patients won’t improve finances at hospitals much—if at all.
But hospitals have improved their bargaining power by scooping thousands of formerly independent physicians and by consolidating into larger chains. (This consolidation has been justified as helping produce coordinated care that saves money, but don’t hold your breath on that. Most of the organizations that have tried it so far have either not saved money and some have just given up after trying it for a eyar or two.)
So hospitals will have the clout to make cost-shifting, which averages about $1,000 per commercially insured person, continue.
With costs still rising, the number of Hoosiers paying thousands of dollars out of their own pocket each year will go up. That's because employers, trying to duck Obamacare’s 2018 “Cadillac” tax, are turning in higher numbers to high-deductible plans. Also, the majority of customers on Obamacare’s exchanges are expected to opt for low-cost bronze and silver plans—which will also come with high deductibles.

This higher exposure on health plans was not President Obama's goal when this process started back in 2009, but it’s the one of the only ways now to keep health care affordable.
Proponents of Obamacare also hoped it would end the “job lock” that now keeps workers stuck at employers with good health benefits, because the current individual markets are so unattractive. But I expect employer-provided benefits to remain the preferred option for just about everyone, and therefore, “job lock” will continue.
I see this happening because, after the employers with relatively healthy workers move to self-insure, they will steal away healthy patients that would otherwise have been factored into the risk pool for the individual markets, pushing up rates there.
That’s not to say that life won’t improve in the individual markets. It will, in quite substantial ways, as I discussed in my post predicting that Obamacare will work.
But expect Obamacare’s exchanges and individual markets to have a second-class status that Hoosiers will avoid, if they can. The exchanges will be the province of low-wage workers, who are the ones that will benefit most from Obamacare’s subsidies.
But for anyone who gets no subsidy or only a small one, health coverage in the exchanges will be expensive and will come with limited choices on doctors and hospitals.
Add to that the fact that Indiana Gov. Mike Pence is unlikely to expand eligibility for the Indiana Medicaid program up above the poverty limit—as called for by Obamacare—and you get a whole lot of Hoosiers still uninsured. Based on estimates from the actuarial firm Milliman Inc., there will still be about 400,000 Hoosiers uninsured, without a Medicaid expansion. Most of those folks will actually have lower incomes than those getting subsidies for health insurance in the exchanges. But there will be no help for them.
So, as I said, there will still be huge inequities in Hoosier health care—just like there were before the drive to pass Obamacare.
“I am not the first president to take up this cause,” Obama declared in a speech about health care reform to Congress on Sept. 9, 2009, “but I am determined to be the last.”
The president's determination, unfortunately, will not be enough.

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Most individuals will pay less, not more, in Obamacare exchanges

Note: This post has been changed to correct errors that stemmed from a misinterpretation of data provided by the Indiana Department of Insurance.

The Indiana Department of Insurance last week announced that premiums for individual health insurance will be 124 percent higher next year, on average, than they were in 2012.

And the insurance department attributed 72 percent of that increase solely to the Jan. 1 implementation of Obamacare.

Ouch, right?

Well, not so fast.

At least for the average consumer buying in the Obamacare exchanges next year, these rate hikes will be more than offset by the subsidies that Obamacare will also make available to individual health insurance consumers.

Obamacare, aka the 2010 Patient Protection & Affordable Care Act, will create a new marketplace for Hoosiers buying health insurance on their own, called an exchange. The exchange will be a web site where consumers can compare plans from various health insurers.

In Indiana, only four health insurers will offer health plans on the exchange. Anthem Blue Cross and Blue Shield will offer a plan statewide. Also, MDWise Inc. will offer a plan in 16 of 17 regions around the state.

Fort Wayne-based Physicians Health Plan will offer a plan in roughly half the state. And Coordinated Care-Celtic will offer a health plan in just three out of 17 regions of the state.

Hoosiers that buy coverage via the exchange will be eligible for federal subsidies, if their household incomes fall between 100 percent and 400 percent of the federal poverty limit.

For a single adult, that means between $11,490 and $45,960. For a family of four, that means between $23,500 and $94,200.

The Indiana insurance department said the average plan offered in the exchange will cost $570 per member per month. Now as Sarah Kliff of the Washington Post noted, the actual rates for some of the cheaper plans offered in the exchanges will be much lower than this average figure the insurance department announced.

A 47-year-old male who does not smoke would be charged, on average, $307 per month, Kliff noted, citing a sample plan filing by Indianapolis-based Anthem. A sample plan filing from Indianapolis-based MDWise predicts a 47-year-old man will be charged $294 for a bronze plan or $391 for a somewhat better silver plan.

What those rates still leave out, however, is the impact of the subsidies. Obamacare promises that customers with incomes at the federal poverty limit will pay no more than 2 percent of their income for health insurance premiums. The subsidies will cover the rest.

That exposure slides up to 9.5 percent for Hoosiers making 300 percent to 400 percent of the federal poverty limit.

So let’s take an average case, right in the middle of that income range. Let’s say a 47-year-old adult non-smoker, making 250 percent of the federal poverty limit—or $28,725 per year—buys a silver plan on the exchange. He or she will be required to pay no more than 8.05 percent of his or her income for that coverage That means he or she will pay no more than $2,312 per year, or about $193 per month. You can do the calculation for yourself here.

The average individual premium for similar coverage last year was about $210 per member per month, according my analysis of Anthem's filing with the department of insurance. So my average 47-year-old would save $17 per month, or about $204 per year.

If we used a family of four with two adults and two kids, this time making 300 percent of the federal poverty limit ($70,650 per year), they would pay no more than 9.5 percent of their income, or $6,712, on insurance premiums.

That punches out to be $140 per member per month—much lower than the $210 average from last year. See the calculation here.

Now perhaps my average cases weren't so average. That may mean my estimates of savings are too high.

The point is, however, that the Obamacare subsidies will negate most of the premium increases for most Hoosiers that qualify for a subsidy to buy individual coverage next year.

Now, is that good public policy? Maybe, maybe not.

Will it overwhelm the new streams of tax revenue created by Obamacare--not to mention the taxpayers themselves--if repeated in 50 states and allowed to continue for many years? Maybe.

But it’s important to note both the benefits as well as the costs of Obamacare if we’re going to have sensible discussions about its merits as a public policy.

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Relax, rejoice: Obamacare will revive health care

This is the first of three blog posts, each of which will make a compelling case for one of three distinct positions on Obamacare in Indiana: why it will succeed, why it will fail and why it will be a “non-event.” The second and third posts will be published Aug. 5 and 8, respectively. No single post should be read as my personal view on Obamacare, but rather as my best attempt to analyze the available evidence for three potential outcomes of the law.

Critics of President Obama’s overhaul of the American health care system should remember that Dr. Obama was given a very sick patient when he arrived in office in 2009. The system had these worrisome symptoms:

1) per-capita costs double those in other developed countries. Health care costs have been crowding out other spending at public institutions and making some companies uncompetitive with foreign peers;

2) worse rates of chronic diseases and even mortality than other developed nations;

3) a private insurance market that encouraged health insurers to woo healthy individuals while allowing them wide latitude to refuse or rescind coverage to people actually in need of care;

4) 850,000 Hoosiers and nearly 50 million Americans—roughly one in every seven people—who had no insurance coverage at all; and

5) a bizarre financing system that rewarded hospitals and doctors for building more buildings, buying more equipment and doing more stuff to every patient they could and, at the same time, gave patients no incentive to seek less or less-expensive care.

I could go on. But let’s just say American health care was essentially flatlined.

Obamacare, when it fully kicks in Jan. 1, is like a defibrillator. It will cause the patient to convulse wildly, but in the end, will get the patient’s heart beating again, leading to a much healthier future.

You’ll start seeing the convulsions exactly two months from now, when the Obamacare exchanges start operating. Even the president has admitted that there will be “glitches and bumps.” These may go on for a year or two or three. But they will end, and no one will remember them.

The same thing happened when the Medicare program launched its Part D drug benefit for seniors. People were hollering about the complexities and glitches in the early months of that implementation. But by and by, things smoothed out and people just settled down to enjoy their new benefits.

The same thing will happen with Obamacare.

Beyond technical functionality, however, Obamacare also needs three other kinds of success: economic, fiscal and political. I think the pieces are there for wins in all of them.

Obamacare’s basic economic calculus is this: Everybody pays so everybody benefits. So long as the little-pain-for-larger-gain equation holds true for the majority of Americans, the policy will work.

The biggest weak point for Obamacare is that the costs of buying health insurance are far higher than the costs of not buying it. This is why some have predicted that employers will stop offering coverage and that young people will fail to buy it—opting instead to pay Obamacare’s relatively modest fines.

But here is why neither problem will materialize: There are hidden costs for both groups that run far higher than Obamacare’s fines.

Employers will remain in a competitive market for workers, and health benefits will be as important as ever to workers—if not more, since Obamacare will fine them if they don't buy it. So dropping coverage will cost an employer far, far more than a $2,000-per-worker fine, as I discussed in detail here.

Young people simply face a penalty next year for not buying insurance of just $95 per adult, or 1 percent of household income. The fine will rise to $695 per adult, or 2.5 percent of household income, in 2016.

But what’s more significant is that, even though insurers must cover even the sickest people, insurers only have to do so during a once-a-year enrollment. That means that if I’m young and uninsured and I get in a massive motorcycle accident, none of the hospital bills I incur before I am allowed to enroll in a health plan will be covered. That’s a risk—once they realize it—that not many young people will take.

Not to mention that buyers under age 30 have a fairly cheap option: They can obtain catastrophic coverage costing significantly less than the $4,900 average policy Anthem Blue Cross and Blue Shield will sell in Indiana's exchanges.

Another economic challenge for Obamacare is paying for its improvements in the individual insurance market. Obamacare guarantees coverage even for very sick customers with cancer and incurable chronic diseases. It also guarantees richer benefits for customers in the individual insurance market—so, for example, young women aren’t surprised to find out that their health insurance actually does not cover childbirth.

Obamacare tries to shift the cost of these new rules onto taxpayers—via subsidies paid to single insurance buyers making up to $46,000 and families of four making up to $94,000. The idea is to reduce the estimated $1,000-per-person premium private health insurance customers now pay to cover the unpaid bills of the uninsured. The idea behind Obamacare is to stop this cost-shifting by insuring more people by having everyone pay a bit more in taxes.

I think the broader-tax-plus-broader-insurance strategy will work and will produce a more stable insurance system over time.

Obamacare is also furthering a gradual slowdown in health care spending and insurance premiums that began a decade ago. And those smaller increases in health care spending will help moderate the increases in the cost of insurance Obamacare will inevitably inflict on low-risk individuals (young men and older women) and healthy employer groups.

How is Obamacare contributing to cost savings? The law threatened significant cuts to Medicare benefits for seniors. At the same time, Obamacare created new kinds of finance programs for hospitals and doctors—such as accountable care organizations—which have gotten far more traction in the marketplace than I expected when the law was passed in March 2010.

Nearly every hospital in Indiana is now trying to cut its expenses between 15 percent and 25 percent, which will finally force the health care industry to adopt the IT and organizational efficiencies the rest of the country did 25 years ago.

Doctors will certainly get pinched in this process, even as they are also asked to see more patients. But since most of them have sold their practices to hospitals—and now rely on the mother ship for their staffs, record systems and other key equipment—few will be able to jump ship, even if they don’t like the way Obamacare changes their lives.

Private insurers are encouraging cost-cutting trends, too. They are starting accountable care contracts (basically a 21st century version of an HMO) with hospitals and doctors, paying them less upfront but offering rewards for keeping spending low and patient health high. Such arrangements are the basis for all four of the health plans offered on the Obamacare exchange in Indiana.

And Obamacare is forcing the insurers to pass these cost savings to consumers by capping insurer profits and requiring them to give rebates when they don’t spend at least 80 percent of consumers’ premiums on medical care. Hoosiers are set to receive $22.6 million in rebates this year, after receiving $14.2 million last year.

While it’s hard to see that these mechanisms held down premiums in Indiana—where exchange costs are shooting up 124 percent, on average—in other states, insurers have actually lowered their prices after seeing their competitors' offerings on the exchanges.

Sally McCarty, the former commissioner of insurance in Indiana, said she had never seen anything like that in her entire career in the industry.

This moderation in overall health care costs will help Obamacare overcome one of its other challenges. The fact that the law will take in less in new taxes than it spends on exchange subsidies and payments to states to expand Medicaid.

But with Medicare now spending less than projected on health care for seniors, the budget math gets easier for Obamacare. That will help tamp down fiscal issues Republicans could have exploited to build a political pushback against the law. Also, since more than 95 percent of employers have decided to keep health coverage, at least for 2014, there won’t be any flood of customers into the exchanges—which also could have drawn down more subsidies and caused the fiscal cost of Obamacare to balloon.

For Obamacare to be a complete success in Indiana, it will also need to win a political victory by wooing one of its most hostile opponents: Republican Gov. Mike Pence. But if the Obama administration can cut an acceptable deal to allow Pence to expand Medicaid coverage using something like the Healthy Indiana Plan, the Hoosier GOP will become politically invested in the success of Obamacare. That, I think, will be the game winner here. Republicans will stop trying to kill the law and instead start working to improve it.

Obamacare is a bit of a mish-mash of therapies for a sick system. And as I said before, it’s a mix of remedies that won’t go down without some grimacing and coughing. But if we, the patient, take the medicine and do our part to help it work, we will look back in a few years and say this was the time when things started to get better.

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WellPoint expects Obamacare to boost revenue to $90B by 2016

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WellPoint sees small-biz plans slip ahead of Obamacare

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